The retirement playbook seems straightforward: save as much as possible and pay as little tax as you can. Most diligent savers focus on maxing out tax-deferred accounts like 401(k)s and IRAs.

For many Americans, the “magic number” for a comfortable retirement is $1.46 million in 2026, up from $1.26 million a year earlier, according to Northwestern Mutual’s latest study. Roughly 655,000 Americans had seven-figure retirement accounts as of late 2025, according to Fidelity data cited by Morningstar.

But here’s the catch: hundreds of thousands of these everyday millionaires have put themselves squarely in the sights of the “tax torpedo” — paying more in taxes than many other retirees.

The Millionaire Tax Trap

The U.S. tax code is progressive at the bottom and flexible at the top. Low- and middle-income earners enjoy protections, exemptions, and credits. Individuals with combined income below $25,000 generally pay no federal tax on Social Security benefits; married couples filing jointly are exempt until $32,000. The OBBBA also offers an additional $6,000 deduction for taxpayers 65 and older ($12,000 for couples), phasing out above $75,000 for single filers and $150,000 for joint filers.

Meanwhile, the ultra-wealthy derive income more tax-efficiently. Wages and retirement account withdrawals account for just 15% and 7% of income for the top 0.01% and 0.001% of households. Most of their money comes from capital gains, dividends, rental income, or borrowing against assets — all receiving favorable tax treatment. Entrepreneurs can exclude up to $15 million in capital gains under the Qualified Small Business Stock exclusion.

Why Middle Millionaires Get Squeezed

Conventional millionaires — those who built wealth through ordinary income and maxed-out retirement accounts — face a heavier burden.

Consider $1.5 million in a 401(k). A 4% withdrawal ($60,000) plus Social Security can push income high enough that up to 85% of benefits become taxable. The thresholds are low and inflation-unadjusted: 85% of benefits become taxable once combined income exceeds $34,000 for single filers or $44,000 for joint filers.

At $3 million, a 4% withdrawal ($120,000) can trigger Medicare IRMAA surcharges. Surcharges kick in when modified adjusted gross income tops $109,000 for single filers or $218,000 for joint filers, with the highest tier at $500,000 and $750,000.

A large 401(k) or IRA can also push you into a higher bracket when Required Minimum Distributions begin — currently at age 73, rising to 75 in 2033. The same accounts that cut your tax bill while working can leave you with a bigger bill in retirement.

How to Defuse the Tax Torpedo

Morningstar offers a simple solution: spend some tax-deferred money earlier.

Retire a little early and delay Social Security to age 70. That creates a 10-year window to draw down or convert retirement accounts while your taxable income is lower. Take enough to stay within a lower bracket or convert to a Roth IRA, paying tax now rather than facing a bigger bill later. Delaying Social Security also boosts your eventual payout with credits of up to 8% per year after full retirement age.

If you’re still working, don’t put everything in a traditional 401(k). For 2026, workers can contribute up to $24,500, plus catch-up contributions. A mix of traditional and Roth savings gives you flexibility over where retirement income comes from — and how much goes to Uncle Sam.

The OBBBA’s bonus deductions for seniors expire after 2028, so precise planning is critical — especially for retirees with portfolios of $250,000 or more. Working with a financial advisor can help reduce costly oversights.